Non-convex budget set, hours restriction and labour supply in Sweden

Abstract

This paper presents the results of a labor supply study based on Swedish labor market data and data from filled-in tax returns. The model is designed to deal with non-convex budget sets (implied by the tax and social security rules), restrictions on hours and with the joint decisions of married couples. A novel feature is the assumption that the basic choice variable is unobservable, here denoted match. Given a match, wage, hours of work and non-pecuniary attributes follow. The individuals are assumed to select the optimal match from the maximization of utility. A specific hours of work distribution is derived and estimated on data from 1981. The results indicate a rather weak wage responsiveness in Swedish labor supply. Several policy simulations have been performed.